Today's Question
Producer surplus is the difference between the market price and the minimum price a seller would accept. If a farmer would sell apples for at least $1/lb but the market price is $3/lb, the surplus is $2/lb. Why is total producer surplus shown as the area between the price line and the supply curve? What happens to it when costs rise?
Model Answer
Supply curve shows minimum acceptable prices at each quantity. Everything ABOVE that curve but below market price is 'bonus' money - surplus! It's profit above the bare minimum needed to produce. When costs rise: The supply curve shifts up, meaning the minimum acceptable price rises. The area between price and supply shrinks - less surplus. If costs rise above market price, surplus becomes negative (losses) and firms exit.